Interbank lending rates in the United Arab Emirates fell to multi-year lows on Sunday as the dollar-pegged country brings the cost at which banks lend to each other into line with its neighbours and the United States. Since August, the UAE central bank has undertaken a raft of measures to lower the rates it long said were too high.
The central bank took control of the fixing process earlier this month when participating banks began submitting their daily rates to the central bank. Since then, rates have steadily declined.
The one-month Emirates Interbank Offered Rate declined to 1.5075 percent on Sunday, its lowest level since July 2004, while the three-month rate fell to 1.95625 percent, its lowest level since June last year.
"Typically what happens is that the pegging country adjusts its interest rates along with the anchor country and since US rates are at decades-lows that's why we are seeing these lows here," said Giyas Gokkent, head of research at National Bank of Abu Dhabi.
The US benchmark federal funds rate stands at between 0-0.25 percent. The UAE benchmark repo rate stands at 1 percent. In its effort to bring down the cost of interbank lending, the UAE central bank also rejigged the panel of providers for the Emirates Interbank Offered Rate (EIBOR) and altered the formula used to calculate it.
"But if you compare UAE rates with those of Saudi Arabia they are still high. There is still substantial room for them to fall," Gokkent said. The interbank cost of borrowing dollars, euro and sterling has been steadily falling for a year as central banks pumped liquidity into the market and record low rates have been registered at the daily fixings in London.
London interbank offered rate for three-month dollars stood at 0.28188 percent on Friday, while the one-month rate was 0.24375 percent.
Tighter liquidity conditions had caused UAE interbank rates to fall at a slower rate than its neighbours from peaks reached in the midst of the global credit crunch, Gokkent said. "Some foreign money went out and then there was a drying up of external credit because international banks had their problems and banks here had used foreign borrowing to fund their asset growth."